Gilles L Farand v. Minister of National Revenue, [1983] CTC 2275

D C Taylor [TRANSLATION]:—This appeal, heard on November 15, 1982 in the City of Montreal, Quebec, is from a tax assessment for 1977 in which the Minister of National Revenue added the sum of $45,891.86 to the income reported by the taxpayer, with the following explanation:

Additional income from an appropriation of

property in Pétroles Farand Inc $45,891.86.

The appellant set out the following facts:

Pétroles Farand Inc had been a family business for a number of years and was the driving force behind Chantannic Inc and Boulevard Mercury and, as a result, behind Gilles Farand’s financial assets.

All my business is done through the Banque Provinciale, which handles the financial commitments and guarantees. Since Pétroles Farand is the force behind all this, the Banque Provinciale used to make advances to the various companies which were guaranteed by Pétroles Farand Inc and as a last resort by Gilles Farand personally.

The Bank naturally holds the guarantees of each company and of Gilles Farand. For unknown reasons the Bank changed managers during this period and Boulevard Mercury’s affairs deteriorated to such a point that the company closed down and the Bank got paid through Pétroles Farand Inc. In order to be paid through Pétroles Farand Inc they certainly had the guarantees to support their decision, as had always been the case in the past.

The Bank’s intention, in the event of difficulties, was to be paid through Pétroles Farand, as was done and as I had been told on numerous occasions. If the fact that one of the two Banque Provinciale managers forgot or lost a document during the transition directly affected Gilles Farand’s personal assets, it was because his holdings were in Pétroles Farand Inc and not in Chantannic Inc, a newly created company, or Boulevard Mercury, a company in difficulty.

In making his assessment the Minister relied on the following facts set out in the reply to the notice of appeal.

During 1977 the appellant, Mr Gilles L Farand, was the principal shareholder of Chantannic Inc, a company incorporated under the Quebec Companies Act;

During the said year Chantannic Inc held all the shares of Pétroles Farand Inc, a company incorporated under the Quebec Companies Act:

The appellant was also a shareholder of Boulevard Mercury Sales Inc during the year in question; the said corporation was also incorporated under the Quebec Companies Act;

On February 4, 1976 the appellant and one Gilles Sauvé jointly and severally guaranteed the obligations of Boulevard Mercury Sales Inc to the Banque Provinciale du Canada; their joint and several liability under the said guarantee was not to exceed $215,000.00;

The contract of guarantee between the appellant and Mr Gilles Sauvé on the one hand the Banque Provincial du Canada on the other was in effect duirng the 1977 calendar year;

Pétroles Farand Inc for its part did not guarantee the debts of Boulevard Mercury Sales Inc during the 1977 calendar year;

Boulevard Mercury Sales Inc went bankrupt during the 1977 calendar year, with the result that the Banque Provinciale du Canada demanded that the appellant pay the sum of $45,891.66 [sic] in performance of its guarantee obligations;

The said sum of $45,891.66 claimed by the Banque Provinciale du Canada was paid to the Bank by Pétroles Farand Inc during the 1977 calendar year;

Pétroles Farand Inc paid this sum of $45,891.66 pursuant to the direction of or with the concurrence of the appellant, the latter being at the time the principal shareholder of Chantannic Inc, the company that controlled Pétroles Farand Inc;

The said sum of $45,891.66 would have constituted income of the appellant for the 1977 taxation year if this sum had been paid directly to him during the 1977 calendar year;

Pétroles Farand Inc recorded this sum of $45,891.66 in its books for its 1977 taxation year as an advance to Boulevard Mercury Sales Inc, with the result that it did not demand that the appellant repay the said sum either during 1977 or subsequently.

Moreover the respondent relied inter alia on sections 3, 9, 15(1), 56(2) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, as applicable to the 1977 taxation year.

In my view the most important fact to emerge from the evidence is that Pétroles Farand Inc (“Pétroles”) did not guarantee the obligations of Boulevard Mercury Sales Inc (“Boulevard”). The said sum of $45,891.66 was paid by Pétroles in satisfaction of the appellant’s own obligation, and the said sum constitutes income of the appellant. Notwithstanding the appellant’s submissions in his notice of appeal and in his testimony, I am sure that the payment was made for the taxpayer’s benefit and with his concurrence. I would refer to the comments made in Elizabeth Waddell v MNR, (not yet reported), where the sum in question did not represent a “payment” under th provisions of subsection 56(2) of the Income Tax Act. The sum involved in the present case is a payment and is covered by the provisions of the said subsection 56(2), and the Board therefore need not consider the provisions of subsection 15(1) of the Act.

The appeal is dismissed.

Appeal dismissed.